The Two Weeks That Will Be (22nd September 2024)
1. The UK
Team BM is in Liverpool for the first Labour Party conference since the new regime took power. Away from the sideshow media tumult over free glasses and holidays, this will be the first real set piece moment for Rachel Reeves since she became Chancellor. She doesn’t want to pre-empt the OBR, obviously, for as we all know they are in the driving seat for this Budget (and all future significant fiscal announcements, thanks to the Budget Responsibility Act 2024). But she has to fill the vacuum and will gladly repeat her mantra that stability is the key to growth.
She told The Sunday Times that ‘if we can bring stability back…then we can realise this prize that has eluded us the last few years, which is a vibrant, successful economy creating good jobs [and] productivity growth in all parts of the country that actually makes people better off’. Business Secretary Jonathan Reynolds echoed in his interview with the FT that ‘If you can’t offer economic and political stability, you don’t have anything’.
Which leads to the slightly unusual situation of a brand-spanking new government trying to balance the decimal places on the spreadsheet rather than offering a bold new vision for the country. Because the vision can’t happen without the spreadsheet. And the spreadsheet is the vision because stability = growth.
Reeves went on to explain: ‘I’m not going to give anyone any false hope. Unless you can say where the money’s going to come from, you can’t make a commitment — and I can’t say that we have the money to do those things’… ‘The numbers that matter are government borrowing numbers and the numbers that came out on Friday showed that already in the first five months of this [financial] year, the borrowing is £6.3 billion higher than the Office for Budget Responsibility (OBR) had forecast in spring’.
And there you have it. She cannot commit to anything yet because she doesn’t yet know exactly what she has to play with. By outsourcing the whole process to the OBR, she is going to be given a number that will enable her to meet her fiscal rules. And to get to x, she will then divide up a, b, c, d, e, all the way to z. 100million off a pensioner here, 1bn to a train driver there. All the way through, optimising each constituency for its political benefit versus its economic cost.
She did however make one new commitment: ‘I’m not looking at creating some new tax, or a wealth tax’. This will be scant relief when she reforms all the current taxes on wealth such that she might as well have just slapped a new tax on the wealthy.
In the melee the Bank of England have decided to adopt a wait-and-see approach. Their announcement of maintaining the same target for balance sheet run-off might have looked like an extra boost into the Chancellor’s spreadsheet of fiscal headroom but in reality it was just a way for them to get out of the way. They only have to actively sell around £13bn of bonds to meet the target thanks to a chunk of maturing debt running off next year. Andrew Bailey does not want to be a part of the government’s fiscal credibility story. BOE speakers Greene and Pill offer their updates on the outlook on Wednesday 25th September and Tuesday 1st October respectively.
2. The US
Powell won the argument and managed to convince the FOMC that if you’re going to cut rates then go big or go home. In exchange, the recalcitrant hawks snuck fewer hikes into their dot plot forecasts – nine of nineteen went for only one or fewer cuts before the end of the year, despite the median dot pencilling in 2x25bp.
The next payrolls report on Friday 4th October could provide grist to Powell’s dovish mill as the benchmark revision would suggest average monthly jobs growth of more like 50k rather than the 125k we had been used to seeing. The key question remains whether there is excess labour supply that is going to meet vacancies or if those vacancies are now gone and the supply just sits there listlessly waiting for a job that will never come. The bellwether ISM Manufacturing survey on Tuesday 1st October will offer an update.
There are a plethora of Fed speakers ahead but we know the Fed is not a democracy so the key one remains Powell. He is only giving pre-recorded opening remarks on Thursday at the NY Fed US Treasury Market Conference so it looks like he’s happy for his committee members to debate in public the wisdom of his punchy decision. We know Bowman wasn’t on board and she will reiterate this on Tuesday but it will be interesting to see if Kugler or Cook offer any fresh insight on Wednesday and Thursday respectively.
3. Japan
After the volatility wobble in markets in August we will be keeping an eye on who becomes the new Prime Minister of Japan after the LDP elect their new leader. The first round ballot takes place on Friday and there is an unusually large field of candidates after former PM Kishida helped to abolish the factions that usually dominate LDP party politics. Nine candidates hope they might take the crown, including former defence minister Ishiba and the son of former PM Koizumi along with a female candidate, the Minister for Economic Security, Sanae Takaichi.
Ahead of the vote, which will lead to a second round unless one candidate takes over 50%, we will also hear from Bank of Japan Governor Ueda on Tuesday. This will be his opportunity to set a hawkish tone ahead of whoever takes the reins as PM. Japan is finally emerging from the lost decades of deflation. Wage growth should be confirmed in the bellwether Tankan survey which is released on Wednesday 2nd October.
4. The EU
The latest German state election, this time in Brandenburg, provided another strong showing by the AfD and the new BSW party, with exit polls showing the former on 30% of the vote and the latter on 13%. At the time of writing, Scholz’s SPD managed to hold onto first place by a couple of percentage points but as the leader of the SPD in Brandenburg warned, “put on the euphoria brakes” as this is hardly a ringing endorsement of the party.
Whilst Germany and France are consumed by domestic matters, Ursula Von Der Leyen quietly conducted a power grab. Her nominees for the 26 commissioners were not unveiled to Parliament but instead directly to the press. She ripped up any organisation chart, saying that each was “equal” with “equal responsibility”. She sliced and diced portfolios, ostensibly to promote cooperation but in reality to divide and conquer. Belgium’s Hadja Lahbib has to combine crisis management and equality. The former Mayor of Dubrovnik is Commissioner for the Mediterranean which includes ‘promoting all the steps needed for a two-state solution‘ between Israel/Palestine. Hopefully she gets on well with Estonia’s Kaja Kallas who is responsible overall for the EU’s Foreign Policy.
Von Der Leyen also awarded extra powers to her loyalists and removed critics, such as France’s Thierry Breton. Or, as he would have it, he resigned very publicly via tweet, as von der Leyen had asked Paris to withdraw his name “for personal reasons that in no instance you [von der Leyen] have discussed directly with me”.
Now VDL just has to get a very fractious and fragmented European Parliament to scrutinise and accept all 26 of these new, equal, broadly responsible, indubitably cooperative commissioners. That will take time.
